Reserve Bank governor Lesetja Kganyago. Picture: GALLO IMAGES/BUSINESS DAY/FREDDY MAVUNDA
Reserve Bank governor Lesetja Kganyago. Picture: GALLO IMAGES/BUSINESS DAY/FREDDY MAVUNDA

It looks like change could be in the air as far as SA’s interest rates go, even if the actual policy decision was what analysts expected. For the first time since the height of the Covid-19 induced lockdown, the five members of the Reserve Bank’s monetary policy committee (MPC) were unanimous.

And it was the two — assuming the same people voted the same way throughout — who had been calling for a cut at the previous three meetings that went with the majority. On Thursday, all five members of the committee voted to keep the repo rate unchanged at 3.5%, even as they upgraded their forecasts for GDP growth and inflation.

The Bank’s growth outlook for 2021 is more optimistic than what was predicted by finance minister Tito Mboweni in his budget in February. It now expects the economy to grow about 3.8%, up from 3.6% at its previous meeting. This implies a much stronger performance for the rest of the year, as it anticipates that GDP actually shrank 0.2% in the first three months of 2021.

It also sees inflation accelerating faster than it has previously said, averaging 4.3% in 2021, before accelerating to 4.4% in 2022, well balanced in the 3% to 6% range. For 2023, it expects price growth to be bang in the middle of the range. One might argue for a cut if inflation is going to be so far below the upper end of the target, but it has long been accepted that the de facto target is 4.5% and some have argued that it should even aim for a rate closer to 3%.

“The overall risks to the inflation outlook appear to be balanced,” the MPC said, pointing to a relatively stronger currency. Even at times of rand weakness since the Covid-19 outbreak a year ago, faster increases in consumer prices have not been the result, a trend the Bank said will continue.

That is not to mean it is not worried about inflation creeping up. The drop in medical inflation that pushed the main rate below 3% in February is likely to be temporary. The MPC also noted the recent increase in oil prices.

Prices did fall last week, but they had increased about 60% since November, with Brent crude reaching $70/barrel. It seems a long time ago that the US oil benchmark West Texas Intermediate (WTI) went negative.

Now the MPC expects higher petrol price inflation at 12.7% for 2021, up from just 4.4% in January. Whether it is load-shedding that kills production in industry or price increases that push up inflation, Eskom is a constant burden to the economy. The Bank now sees electricity prices rising 9.7% in 2021, more than twice the rate it expects for inflation.

These are just some of the factors that have led some in the market to assume the change in MPC voting marks a slant to the hawkish side, confirmed by the Bank’s quarterly projection model showing an increase of 0.25 percentage points in the second and fourth quarters of 2021.  

For starters, the model is just that, and nothing is predetermined, and an interesting change is that it sees the second cut now in the fourth quarter, rather than the third. It is hard to imagine what will change in the next two months to make at least three members of the MPC vote for a hike in May.

The Bank may have become more upbeat on the GDP outlook but that comes with many caveats. The first paragraph of the statement was dedicated to Covid-19 and the potential for new waves of infection, highlighting the risks to that growth outlook.

The cabinet finally came through on Thursday with proposed new timelines for vaccinating the population, but unfortunately, its credibility is not high. With the economy vulnerable to new lockdowns and consumer and business confidence likely to remain weak, SA is not facing an inflation spiral anytime soon and rates will stay unchanged for a while.

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